With captive centres, IT looks to hold on to deals

Five of the top 10 life science services companies globally, adds Bendor-Samuel, which are actively setting up captives in India are currently using service providers.Jochelle Mendonca | ET Bureau | October 19, 2016, 17:25 IST

MUMBAI: For over three years now, there has been a steady drumbeat of news saying companies are pulling their IT spends in-house and setting up their own offshore technology centres, taking money away from the Indian IT services players. Currently faced with slowing revenue growth, Indian IT services players ­ including TCS, Infosys and Wipro ­ are looking at helping customers set up these captives for a sliver of the spend.

“In the past, larger IT players were not interested in setting up captives for clients. With growth slowing, they are also open to this. We are working on a project from a large manufacturing company to set up a captive and all the large players have bid for the deal,“ Dinesh Goel, India head at outsourcing consultancy ISG, told ET. Goel declined to name the client seeking to put a captive in India in this manner, citing confidentiality agreements.

“By helping, they can capture the setup revenue, and often, the first few years of operations. They also often end up with an ongoing relationship as an execution partner capturing 20% or so of the ongoing delivery,“ said Peter BendorSamuel, chief executive officer, Everest Group.

Five of the top 10 life science services companies globally, adds Bendor-Samuel, which are actively setting up captives in India are currently using service providers.

There were about 760 global in-house centres in India in 2012, and it grew to over 1,000 in 2015, according to the National Association for Software and Services Companies. Captives account for $19 billion of the overall Indian IT industry exports of $108 billion.

Broadly, there are two models in which Indian IT companies are beginning to help custo mers set up the captives.

First, a `build-operate-transfer (BOT)' model where IT firms hire employees and run the captive for a period of time before transferring management to the client.

Second, an assisted model where the IT firm helps with special economic zone (SEZ) clearance and creates infrastructure but the people hired are on the client's employee rolls from the start. The choice of model is typically worked out between an IT company and its client.

For instance, Infosys doesn't prefer BOT models.

“We have an assisted captive model, where we help them with the initial setup and SEZ clearance. We do not do the BOT model because when emp loyees are hired, they are Infosys employees and then they have to be moved to the captive's rolls and that can be complicated. We help them hire though,“ UB Pravin Rao, CEO at Infosys, told ET.

Infosys helped set up payment network Visa's captive in India last year, after its work was consolidated with Infosys and Wipro, Pari Natarajan, CEO of management consultancy Zinnov, said.

He however cautioned it was too early to call it a trend.

“We have so far seen more companies buy captives and take them in-house than help clients set up captives. It is a way to ensure you retain mind-space with a client, even when the work is moving back,“ Natarajan said. Infosys declined to comment on particular captives they may have set up.

HCL Technologies helped set up a securities clearing captive for Citibank three years ago in a BOT model, a source said.That captive, in Gurugram, had about 1,400 employees who were initially on HCL Tech's rolls before they were transferred over to Citi Securities and Funds Services. The company also set up a shared services centre for UBS.

“It's not a high-margin business. So, a lot of other big players didn't want to do it before.HCL Tech is actually one of the more successful ones at this.They are willing to make the investment up front, which is something the other large players are just coming around to,“ the source said.

HCL Tech had not responded to a request for comment at the time of going to press.

Smaller players like Zensar say they are open to setting up a captive, depending on the kind of work that would be done at the centres. “It is all about bringing business value to the customer. So, if the captive would be working on digital technologies then would be willing on work on those deals,“ Sandeep Kishore, Zensar's CEO, said.